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Capital Gains Tax rise causes controversy
Written by on 5 August, 2010The proposal of a rise in Capital Gains Tax or CGT has caused an uproar in the financial markets as the effects of an increase are analysed by industry experts. The coalition government’s plans to increase CGT from its current 18% rate come mainly from the Liberal Democrat members, but the idea has come under great scrutiny already.
Capital gains tax affects the sales of assets including buy-to-let properties, shares and second homes. The proposed rise, intended to help reduce debt, has not been well received by Conservative members of the new government and is still in uncertainty as the Prime Minister listens to both sides of the argument to come to an agreement. The plans were in place to close the gap between capital gains tax and income tax, which could see the CGT for non-business assets, such as the profits from second home sales, reaching 40% or even 50% for the highest earners. David Cameron has reiterated that the rise is necessary to create extra tax revenue, considering the simultaneous rise for the lowest threshold for paying income tax to £10,000.
However, business lobby groups and Tory backbenchers have rejected the move, objecting that those with property, particularly those who buy-to-let, and those with investments will be hit hardest. Business and economy officials are urging the coalition to reconsider what they call a tax on ‘growth, enterprise, and jobs’. Increasing CGT rates may decrease the number of asset-holders likely to sell, which would mean less economic activity.
The Adam Smith Institute, a think-tank, emerged this week claiming that the rise in capital gains tax could cost the economy 61,000 jobs after analysing the effects of similar policies in other countries. Their prediction was that it could cost the economy a huge £5.2 billion at most; an increase would make it harder to raise capital for new businesses; investors will expect more, which would mean businesses are left with high costs and less capital. It could discourage investment and worsen the deficit while also affecting ‘ordinary families’ – contradicting the popular belief that it will be a tax on the rich.
Their cries have been heard, however, as it may be that if there is a substantial rise, there will also be a cut on the tax burden of longer-term investments – something that Liberal Democrat seniors are on the most part against. Discussions have been in place over a ‘taper’ system, which would see lower capital gains tax on assets the longer they are held.
This move would be welcomed by investment experts who worry that long term investors will be hit hardest, causing a ‘gambling mentality’ to be encouraged. Shareholders, many of whom will have invested in their own companies, could suffer because of the rise while stock market gamblers would be safe from the tax. Short term speculators regularly take out ‘spread bets’ on shares, to bet whether the price of specific shares will increase or not. However, as this does not mean that they own the shares and is merely seen as a ‘bet’, they are usually exempt from any tax. This could soon become an attractive option and therefore cause a reduction in longer term investments.
It emerged this week that after disapproval from savers, businesses and his Conservative colleagues, that David Cameron has backed down at least on the plans for a blanket 40% rate on CGT. George Osborne’s emergency budget, due at the end of the month is likely to include various ‘opt-outs’ to the tax rises. This could include exemptions for entrepreneurs and those who are nearing retirement age. The over-65s may be completely exempt from the rise, new plans suggest.
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